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Bob Lower wants to retire in 10 years. At that time he wants to have a lump sum accumulated that would allow him to withdraw $35,000 a year for the next 20 years. Assume that Bob earns an after-tax return of eight percent. Ignore the inflation in these calculations.
- How much does Bob need to invest today in order to fulfill his needs?

Question

Quizplus · Accepted Answer

Using the present value of an annuity formula, we can calculate the lump sum Bob needs to invest today:
PV = (PMT * [(1 - (1 + r)^-n)] / r)
Where:
PMT = $35,000
r = 8% = 0.08
n = 20

Substituting values, we get:
PV = ($35,000 * [(1 - (1 + 0.08)^-20)] / 0.08)
PV = $406,181.38

Therefore, Bob needs to invest $406,181.38 today. However, we need to adjust for inflation since we assumed constant dollar amounts in the calculations.

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